Wait and See?

US equities galloped to record highs after the Fed cut interest rates, and Apple reported an impressive earning beat. But equity markets really liked the sound of Chair Powell’s lower for longer US interest rates narrative implied when he suggested rates will not rise so long as inflation runs cool.
Stephen Innes

FOMC Statement

 

The Fed cuts 25bp as expected. The vote was 8-2, with FOMC board members George and Rosengren dissenting in favour of no change. It said business fixed investment remains weak but adds that the labour market has been active.

 

The FOMC took out the sentence in the statement that had said it would “act as appropriate to sustain the expansion”. That can be viewed as a minor shift in the hawkish — or at least less dovish — direction.

While the latest US data doesn’t suggest the economy if coming off the rails just yet, but consumers are tightening their purse strings; the deterioration of the ISM is cause for a bit of concern, and investment spending by businesses continues to shrink. It doesn’t portray a US economy firing on all cylinders either.

With gas still left in the can, the FOMC has ample time to add a few more gallons of high octane to the tank and boost a sputtering US economic engine that’s started showing signs of trade war wear and tear. However, since monetary policy works with long and variable lags and that it will take some time to evaluate the full economic impact of the 75bp of rate cuts already delivered this year, the Fed’s don’t want to risk flooding the engine while keeping some policy tools in the kit for a rainy day.

Overall the Fed is not going to give away their data-dependent rate cut optionality.

Jay Powell has been quite responsive to economic conditions since he took the chair and it’s doubtful the Fed’s are going on gyro pilot. If domestic data, especially consumer consumption and the labour market continues to deteriorate, the FOMC will respond in kind. Call it what you want, but I call it a Mid-Cycle Adjustment until its not.

Oil Markets

A trifecta of adverse developments for Oil markets stopped recovering prices in their tracks as growing optimism that OPEC will consider deeper cuts at the group’s meeting in December was starting to resonate.

The EIA reported a significant swell in US Crude inventories very bearish to consensus, the Fed forward guidance was perceived hawkish and the new US macro data while beating estimates, is still looking soft.

Phase one’ deal between the US and China could help turn confidence, but so far, there are few signs of green shoots on the macro landscape. So, for the time being until the US oil inventories move into a significant deficit or the macro data turns positive, demand fears amid rising US oil stockpiles may supersede signs that Saudi Arabia is willing to make deeper production cuts.

Gold Markets

Gold is reacting positively to the weaker US dollar and lower US bond yields which may have been triggered by the lower for longer US interest rates narrative implied by Chair Powell who suggested interest rates will not rise so long as inflation runs cool.

Strategic gold investors may start to position for a further deterioration in US domestic data that ultimately transitions the Fed from a mid-cycle view to a full-cycle view.

But jumping on the bandwagon a bit too early could be fraught with peril given the significant macro catalyst that lies in wait( NFP) and the upcoming Trump-Xi meeting although Gold prices are likely factoring in the negative fall out from an unexpected trade deal hurdle after Chilean President Pinera cancelled the APEC summit meeting next month, where the phase one trade deal may have been signed.

It’s not that the trade deal if off, but rather APEC doesn’t have a secondary site prepared, and the thought is the longer it takes to sign “phase one” the higher the chance there is for things to then turn sideways given how tenuous the US-China relationship is.

Currency Markets

The US dollar weakened across the board on the Fed rate cut and after Fed Chair Powell alluded to a lower for longer US interest rates narrative when he suggested interest rates will not rise so long as inflation runs cool.

The dollar bulls could still have trouble fading the US dollar weakness even although there is no apparent shift in the interest rate differential side to support the dollar weakness yet. But on the risk side, with tail risks around of Brexit and US-China abating which could eventually bode negatively for the US vs Rest of World interest rate and growth differentials. And when coupled with the Chair Powell reinforcing a lower for longer interest rate narrative which added support to the risk channel, this could also be viewed in a negative light for the US dollar.

This article was written by Stephen Innes, Asia Pacific Market Strategist at AxiTrader

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